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Chevron Corporation (CVX) and Caterpillar Inc. (CAT) Go Head-to-head

Chevron Corporation (NYSE:CVX) shares are up more than 3.41% this year and recently decreased -0.08% or -$0.1 to settle at $129.46. Caterpillar Inc. (NYSE:CAT), on the other hand, is down -2.47% year to date as of 05/17/2018. It currently trades at $153.69 and has returned -0.18% during the past week.

Chevron Corporation (NYSE:CVX) and Caterpillar Inc. (NYSE:CAT) are the two most active stocks in the Major Integrated Oil & Gas industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect CVX to grow earnings at a 48.01% annual rate over the next 5 years. Comparatively, CAT is expected to grow at a 23.31% annual rate. All else equal, CVX’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 18.09% for Caterpillar Inc. (CAT). CVX’s ROI is 1.70% while CAT has a ROI of 7.30%. The interpretation is that CAT’s business generates a higher return on investment than CVX’s.

Cash Flow

If there’s one thing investors care more about than earnings, it’s cash flow. CVX’s free cash flow (“FCF”) per share for the trailing twelve months was -0.03. Comparatively, CAT’s free cash flow per share was -0.48. On a percent-of-sales basis, CVX’s free cash flow was -0.04% while CAT converted -0.63% of its revenues into cash flow. This means that, for a given level of sales, CVX is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. CVX has a current ratio of 1.00 compared to 1.40 for CAT. This means that CAT can more easily cover its most immediate liabilities over the next twelve months. CVX’s debt-to-equity ratio is 0.26 versus a D/E of 2.32 for CAT. CAT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CVX trades at a forward P/E of 17.69, a P/B of 1.63, and a P/S of 1.76, compared to a forward P/E of 12.88, a P/B of 6.04, and a P/S of 1.90 for CAT. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. CVX is currently priced at a -7.63% to its one-year price target of 140.15. Comparatively, CAT is -10.69% relative to its price target of 172.09. This suggests that CAT is the better investment over the next year.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. CVX has a beta of 1.15 and CAT’s beta is 1.32. CVX’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. CVX has a short ratio of 3.05 compared to a short interest of 1.80 for CAT. This implies that the market is currently less bearish on the outlook for CAT.

Summary

Chevron Corporation (NYSE:CVX) beats Caterpillar Inc. (NYSE:CAT) on a total of 9 of the 14 factors compared between the two stocks. CVX is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, CVX is the cheaper of the two stocks on book value and sales basis, Finally, LOW has better sentiment signals based on short interest.

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